MRO Magazine

Momentum slowed in October for manufacturers

Ottawa, ON -- Following eight months of sustained growth in 2004, manufacturing activity took a downturn in October...


December 16, 2004
By MRO Magazine

Ottawa, ON — Following eight months of sustained growth in 2004, manufacturing activity took a downturn in October 2004, according to the latest Monthly Survey of Manufacturing from Statistics Canada.

In October, manufacturers reported fewer shipments for the second month in a row. Finished product inventories also continued to accumulate and fewer new orders were received.


Canadian manufacturers continued to face several challenges in October and signs suggest momentum has slowed. Major factors contributing to this reduced activity include the rising value of the Canadian dollar, which reached a 12-year high in late October, and the price of crude oil, which exceeded US $55 per barrel during the month.


Prices for other raw material inputs have also increased substantially. According to the raw materials price index, manufacturers paid 28% more for their inputs in October 2004 compared with one year ago. The rising dollar, combined with high input prices may be limiting manufacturers’ ability to maintain production at levels seen during the early part of 2004.

Non-durable goods industries include food, beverage and tobacco products, textile mills, textile product mills, clothing, leather and allied products, paper, printing and related support activities, petroleum and coal products, chemicals and plastic and rubber products.

Durable goods industries include wood products, non-metallic mineral products, primary metals, fabricated metal products, machinery, computer and electronic products, electrical equipment, appliances and components, transportation equipment, furniture and related products and miscellaneous manufacturing.

Unfilled orders are a stock of orders that will contribute to future shipments assuming that the orders are not cancelled.

New orders are those received whether shipped in the current month or not. They are measured as the sum of shipments for the current month plus the change in unfilled orders. Some people interpret new orders as orders that will lead to future demand. This is inappropriate since the “new orders” variable includes orders that have already been shipped. Readers should take note that the month-to-month change in new orders may be volatile. This will happen particularly if the previous month’s change in unfilled orders is closely related to the current month’s change.

Not all orders will be translated into Canadian factory shipments because portions of large contracts can be subcontracted out to manufacturers in other countries.


An indication of slowing manufacturing activity was also seen in the most recent Labour Force Survey. In November, the number of factory jobs declined by 18,000, bringing total job losses in the sector to 52,000 since July 2004.


Manufacturing shipments dropped 1.3% to $49.8 billion in October, following September’s 0.7% decline. Shipments have now weakened 2.0% from the record level posted in August ($50.8 billion).

Although the recent declines have eroded some of the gains reported earlier in 2004, January-to-October shipments remain 8.0% higher compared with the same period last year. Shipments measured in constant dollars also declined for the second successive month in October, falling 0.5% to $46.5 billion.


Most industries (14 of 21) accounting for 71% of total shipments, fell back in October. The slowdown was concentrated in the durable goods sector (-2.0%). Motor vehicle manufacturing was the main contributor with a 7.1% decrease in shipments to $5.8 billion. A drop off in motor vehicle sales, particularly in the United States, led manufacturers to sharply lower production in October.

Manufacturers of computer and electronic products also reported weaker activity in October, as shipments declined 6.7% to $1.5 billion. Wood products decreased 2.9% to $3.2 billion, as prices fell sharply. Motor vehicle parts also dropped 2.9% to $2.8 billion, mirroring the effects of the slowdown in motor vehicle manufacturing.

Non-durable shipments slid a more modest 0.4% to $21.7 billion. Shipments of chemical products fell 2.1% to $3.9 billion, while paper manufacturing declined 2.1% to $2.7 billion, as both prices and demand for paper products decreased in recent months.

The petroleum, aerospace and railroad rolling stock industries offset some of the declines in October. Petroleum prices jumped 5.3% from already high levels, boosting shipments 3.6% to a record $4.2 billion. Aerospace products manufacturing rebounded 13.2% to $1.0 billion, while production of railroad rolling stock surged 32.1% to $264 million, as manufacturers continue to meet high demand for railcars in North America.


Ontario reported the largest drop among the six provinces with lower shipments in October. In Ontario, the centre of motor vehicle manufacturing in Canada, shipments slumped $709 million (-2.6%) to $26.0 billion, as both the automobile and parts industries slowed. Shipments in British Columbia declined $84 million (-2.3%) to $3.6 billion, primarily due to the wood and paper products industries. In Saskatchewan, manufacturers of wood and chemical products contributed to a $34 million (-3.9%) decrease in shipments.

Following gains in the aerospace products and parts and the petroleum and coal products industries, Quebec manufacturers reported a $130 million (+1.1%) increase in shipments to $11.4 billion, offsetting some of the overall drop.


Over and above the second straight decline in shipments, there were also signals on the inventory front suggesting that Canadian manufacturing activity was cooling down. Finished product inventories rose 1.4% to $21.4 billion, the highest level since June 2001 and the sixth increase in seven months. Manufacturers may be experiencing difficulty moving their finished goods.

Another indicator of waning confidence is that raw material inventories, which are generally built-up in anticipation of future production, fell 0.2% to $27.1 billion. October’s decrease marks the first decline in eight months. Goods in process inventories declined 1.1% to $13.9 billion.

The rise in finished products inventories was nearly offset by declines in raw materials and goods in process. As a result, total inventories stood at $62.3 billion, up 0.1% from September and extending the upward trend in inventories to 10 months. Inventories have accumulated by almost 7.0% since the close of 2003.

Primary metals (+2.5%), chemical products (+1.8%), food (+1.4%) and petroleum and coal products (+2.5%) contributed to the higher level of inventories in October.


The inventory-to-shipment ratio rose for the third consecutive month due to lower shipments in October. After hitting a record low of 1.21 in June and July, the ratio has inched up to 1.25 in October, the highest point since February 2004 (1.27).

The inventory-to-shipment ratio is a key measure of the time, in months, that would be required in order to exhaust inventories if shipments were to remain at their current level.


Manufacturers’ level of unfilled orders further weakened in October, as orders slipped by 0.3% to $37.1 billion, the third consecutive decline. Among the industries reporting decreases were primary metals (-5.1%), motor vehicles (-8.5%) and motor vehicle parts (-3.9%). Partly offsetting the decline, aerospace products and parts manufacturers logged additional orders in their books (+2.5%).

Despite recent setbacks, the backlog of unfilled orders remains almost 6.0% above levels at the close of 2003.


New orders fell 0.8% to $49.6 billion in October, the third decline in a row. Declines in new orders of motor vehicles (-7.4%), primary metals (-4.1%) and fabricated metal products (-3.9%) were partl
y offset by a big boost in the aerospace industry (+57.5%).